This letter is the start of a process we will, in the future, develop into a more useful and practical asset allocation framework for investors’ portfolios that reflects our macro view, concerns about the general riskiness of the financial world and a variety of issues that go into the asset allocation process.

As a starting point, it is important to understand what real long-run rates of return have been for different assets.2  Good data exists on developed country equity markets by sector and on real estate.

For example, most people know that the real long-run return on U.S. equities is about 6.5%. Small-cap stocks outperform large companies by a wide margin, value stocks outperform growth stocks, also by a wide margin, and small value stocks easily outperform small growth stocks. However, small companies have much greater volatility and business risk.

It is also well known that the real return on bonds lags the real return on stocks, but risk is much less. In a portfolio, the inclusion of some bonds along with stocks lowers risk faster than it lowers returns up to a point.

…continue reading the 14 page Asset Allocation Thoughts

*All chart data from IHS/Global Insights, and may not be reproduced without written consent.

It Looks Like a Golden Harvest

From August 1 to December 31, seasonal strength in agriculture stocks is triggered by cash generated by grain crops in North America that is used to purchase goods and services from farm suppliers, notes Thackray’s 2010 Investment Guide.

Major product purchases include fertilizer and farm machinery. The seasonal trade has been profitable in 12 of the past 15 periods for an average gain per period of 16.3%. In contrast, the S&P 500 index gained an average of only 2.5% during the same period. Purchases tend to peak near year -end when farmers are spending cash to optimize their taxable income level.

Major companies in the sector include Potash Corp. of Saskatchewan (POT/TSX), Mosaic Co.( MOS/NYSE), Monsanto Co. (MON/NYSE), Syngenta AG (SYT/NYSE), Deere & Co. (DE/NYSE), Agrium Inc. (AGU/TSX) and Archer Daniels Midland Co. (ADM/TSX).

Grain prices have an important influence on the seasonal trade. Higher grain prices realized by farmers generate more cash for purchases of farm supplies. Soybean, corn and wheat prices bottomed this year in the first week of June and recently resumed an intermediate uptrend on the charts. Monitoring a basket of grain prices is possible by examining a chart on iPath DJ-AIG Grains Exchange Traded Notes (JJG/NYSE).

Crop conditions in the U.S. Midwest have been ideal this year and U.S. grain production this year could hit a record if weather conditions remain favourable. Hot dry weather this week could have a negative impact if extended. Offsetting higher potential U.S. grain production is lower production expected from other parts of the world, including Canada and Europe.

Production in Alberta and Saskatchewan has been reduced by spring flooding, while dryer than average weather has hurt production in France, Germany and the United Kingdom. Russia recently predicted that grain production this year will slip to 85 million metric tons from 90 million metric tons due to heat and drought conditions. China recently purchased grain on world markets to replenish inventories to normal levels.

On the charts, exchange traded-funds and stocks in the sector are starting to look interesting. All are in intermediate downtrends. Their short-term momentum indicators are deeply oversold and are showing early signs of bottoming.

Stocks in the sector also could benefit from second-quarter earnings reports that are better than last year’s depressed earnings. Two exchange-traded funds are attractive candidates for the seasonal trade: Market Vectors Agribusiness ETF ( MOO/NYSE) and the Claymore Global Agriculture ETF ( COW/TSX).

Read more at the Financial Post HERE

Jon and Don Vialoux are authors of free daily reports on equity markets, sectors, commodities and exchange-traded funds. Reports are available at www.timingthemarket.ca and www.equityclock.com.

Market Buzz – Need Work? Look to Canada! Mosaid Technologies

Toronto’s main index appears poised to end the week up just under 3 per cent, stemming the tide of sharp losses over the prior two weeks (sell-off of more than 4 per cent last week). The gains were driven by a strong up-tick in oil prices and a solid jobs report.

Statistics Canada reported that the economy created 93,200 jobs last month, much higher than the 20,000 that economists had expected. The unemployment rate dropped to 7.9 per cent from 8.1 per cent in May. The jobs picture appears to show that the Canadian recovery hasn’t stalled yet, despite signs of slowing momentum in the U.S. and other economies.

The report even prompted The Huffington Post, a U.S. political and pop-culture website, to post the following; “Stubbornly high unemployment rates got you down? Not sold on the economic recovery? Look no further than America’s polite neighbor to the north, where jobs numbers are surging and home prices have been rising steadily for nearly a year.”

The Post also put up a poll asking its users if they would consider moving to Canada for a job. 58 per cent are currently saying yes, they would follow the money north.

That said, we caution extrapolating too far ahead based on the jobs report as the numbers tend to lag current activity.

This past week, MOSAID Technologies Incorporated (MSD:TSX), a company we follow closely in our Canadian Small-Cap Coverage Universe (www.keystocks.com), posted a strong set of annual results. Founded in 1975 and based in Ottawa, Ontario, MOSAID Technologies Incorporated core business is the licensing of patented semiconductor and telecommunications intellectual property (IP), complemented by the development of innovative memory and other technologies.

For the full fiscal year revenues were up 14 per cent to $71.1 million from $62.5 million in fiscal 2009. 2010 pro forma net income jumped 44 per cent to $30.5 million, or $2.87 per diluted share, from $21.2 million, or $2.05 per diluted share, in fiscal year 2009. Fiscal year 2010 GAAP net income of $21.8 million increased 272 per cent from $5.8 million in fiscal year 2009. GAAP diluted EPS of $2.04 per diluted share, based on 10.6 million diluted shares, compared to $0.57 per diluted share in fiscal year 2009, based on 10.3 million diluted shares.

At the end of Q4 fiscal 2010, the company had cash and marketable securities of $100.83 million, or $8.75 per share, compared to $51.8 million at the end of fiscal 2009.

Looniversity – Debt Vs. Equity Analysts

In investing circles, there are two broad categories of analysts – debt and equity analysts. Debt analysts are known to take a fine-toothed comb to company financials, poring over balance sheets and profit-loss statements. Since they are paid to warn clients whether a company has adequate cash to make its debt payments, they are often ahead of the pack in predicting trouble.

Equity analysts, on the other hand, are more focused on a company’s growth outlook. What are the catalysts that will help earnings? Does the company boast product-line changes that will translate into revenue increases? Most important, will the market reward those trends by bidding up the stock’s price? While it is oversimplification, equities analysts tend to look at the upside, whereas debt analysts tend to look at the downside.

Now the question becomes – which group should investors heed? Experts say each can provide value, but together, they can give a much fuller picture of a company. However, each can have their biases in regards to the company they are assessing (corporate financing). So read each group’s comments, compare them, and take them with a solid grain of salt.

Put it to Us?

Q. When analysts or accountant types talk about “book value,” what are they referring to?

–  Mark Saunders; Montreal, Quebec

A. Outside of the financial world, “book value” can probably be looked at as that little red tag in the corner of your paperback, but within the wonderful world of finance, it has two other distinct meanings.

1. The value at which an asset is carried on a balance sheet (example: a car for a cab company). In other words, the cost of an asset minus accumulated depreciation.

2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.

A. It is the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated.

B. By being compared to the company’s market value (price-to-book ratio), the book value can indicate whether a stock is under or over-priced.

KeyStone’s Latest Reports Section

• Hardware & Software Communications Micro-Cap With Strong Balance Sheet Posts Top-line Growth, Bottom Line Hit by Currency – Maintain Rating (Flash Update)
• China-based Forestry Company Posted Solid Q1 2010, Rating Upgraded on Price Decline (Flash Update)
• Diversified Mining & Environmental Drilling Company Posts Resilient Q1 2010, Solid Fundamentals Relative to Peers, Produces 70% Share Price Gain in Ten Months – Ratings Maintained (Flash Update)
• Under Appreciated Cash Rich Gold Producer Transitions from a Single to Multi-Mine Producer of Gold & Copper – Continue Buy Rating (Flash Update)
• IP Company’s Q4 EPS Exceed Expectations, Solid Fundamentals, Strong Cash Position & Yields 4.6% – Near-term Rating Upgrade (Flash Update)

An Absolute Must Watch Video!!! – Peter Grandich

There is too much leverage in the non-psychical gold market, according to Ben Davies, CEO of Hinde Capital. Davies considers the outlook for the price of gold.

An Absolute Must Watch Video!!! – Peter Grandich

There is too much leverage in the non-psychical gold market, according to Ben Davies, CEO of Hinde Capital. Davies considers the outlook for the price of gold.